Privatization Of Social Security Should Copy Great Britain, Chile

December 15, 1998

President Bill Clinton reportedly has signed on to the concept of partial privatization of Social Security. In closed-door meetings with members of Congress, he told lawmakers he endorsed the idea in principle.

What he didn't say is what type of privatization he favored.

Two ideas are being discussed.

In one, individuals would invest a portion of their Social Security taxes in stocks and bonds, similar to the way they now invest in IRAs.

In the other, the federal government would do the investing, similar to the way states currently invest their employee pension money.

The aim of both approaches is to increase the return on Social Security contributions, and help make up projected shortfalls that under the current system eventually will result in a 75-cent return on the dollar.

The danger with direct investment by the federal government is obvious to anyone with a healthy distrust of Washington: Direct investment would result in the feds controlling trillions of dollars of capital in private markets.

Lawmakers might try to devise laws that would insulate Social Security funds from political considerations, but it's doubtful they would be successful, at least for long. The political pressures would be too great to keep hands off.

Company XYZ handles a strike against it by hiring replacement workers. Big Labor would demand it be punished by the government selling the stocks and bonds it owns in the company, even at a loss.

Drug company ZYX decides to market a "morning after" abortion pill. The religious right would insist that no Social Security money be invested in the corporation.

A defense contractor finds its stock plummeting. The generals and their allies in Congress would demand the company's stock price be bolstered through government purchases.

Currently, decisions on how to invest state pension funds are subject to this type of political pressure. Don't think it wouldn't happen with a federal Social Security fund.

With individuals doing their own investing in different stock and bond funds, the government wouldn't be able to so easily apply pressure to companies that don't toe the line of whatever is politically fashionable at the moment.

Great Britain and Chile are among the countries that have successful, partially privatized Social Security systems up and running. In these highly popular programs, individuals make their own decisions on where to put their money.

If Congress and the president decide to embark on privatization, they should look to Great Britain and Chile for advice and counsel.